You have probably heard a thousand times the famous mantra by management guru Peter Drucker: “Culture eats strategy for breakfast”. Even if an entreprise culture is usually difficult to describe accurately, most employees know which behaviour is “right” or “wrong” at their working place.

For organizations with innovation in focus, to establish a resilient culture is, in my opinion, a critical issue. The reason is the project-based nature of such businesses. The successful development and launch of new products and services must be based on effective control of tight time schedules, seamless and respectful collaboration within cross-functional groups and consistent objectives across the different roles, departments and business units of the company. It is a difficult task.

The responsibility of the CEO is therefore to create a culture that avoids and even self-corrects flaws in the innovation system, improving it almost by design.

The combination of three types of incentives can make it possible.

1) The performance-linked monetary incentives. These are the most common ones. They should, however, be strongly linked to performance related to innovation efforts. I had once a manager that had his performance as a director for an innovation team partially linked to the sales of the company in another continent. His possibilities of having any remote influence on that parameter were obviously zero.

However, performance-linked incentives alone may trigger undesired effects.  Some years ago, an R&D director (my boss at that time) was experiencing a hard time trying to meet the deadlines for the design of a new connector for electronic devices. The manufacturing department was getting impatient. The heat was on. His performance was in the balance. The solution? He took the blueprints of the new design as it was and instructed a subordinate to send them to manufacturing anyway. He knew the design was not totally ready, but the fact was that the project had theoretically gone one step further in the process. The responsibility for the mess had suddenly become a little more difficult to track.

“I don’t care how it looks. I want this out of my desk and passed onto the manufacturing desk”

R&D director, multibillion corporation in electronics

Good for him? Maybe. But a wrong decision for all other employees and for the shareholders of the company. Isolated, monetary incentives are not enough to create a winning innovation culture.

2) The collaboration incentives. In order to avoid situations as the one described above, the incentives scheme has to be linked to the performance of the next link in the innovation process. Collaboration and solution-oriented teams are created themselves if their members feel dependent on each other to achieve common objectives and bonus. Some companies design compensations schemes with this idea in mind. For example, the design team should be compensated based on the performance criteria of the manufacturing team too.  As I wrote in a previous post, “Three mistakes that will ruin your project from the very beginning”, innovation team members temporarily transferred from other departments should have their bonus for the period  linked to their performance as a team member.

And still, such collaboration incentives may cause some undesired effects for the innovation efforts of the company too. Employees within the innovation team and even across departments can agree to communicate only the positive aspects of the project or / and mutually cover their mistakes or project flaws. They may even try to attach their faltering project to prestigious programs even without a logical connection with them in order to save it.  Employees will do whatever it takes to keep a project alive if their bonus depends on it.

Enter the role of strategic consistency.

3) The consistency incentives. In previous posts I have explained the paramount importance of having an innovation strategy. A top management that has decided the innovation strategy for the company (organic, radical, disruptive or architectural) has to communicate  it clearly to the organization and tolerate no deviation from it. The same applies to the Key Performance Indicators that define the financial and operative performance of the corporation. Bonuses must thus be linked to the innovation strategy of the company and KPIs in order to create, together with performance-based and collaboration-based incentives, a robust and durable innovation culture. Innovation initiatives that  fall outside the selected innovation strategy frame should be killed. Underperforming projects when measured against their real or expected KPIs should be killed.

Innovation managers should therefore have part of their compensation linked to the consistency of their project portfolio. This will force the innovation team and other parts of the organization into making decisions consistent with the overall objectives of the shareholders. A project portfolio review becomes then a powerful tool that limits the amount of time, resources and funds wasted on bad projects.

CEOs that want to create healthy growth for the company and its shareholders based on innovation have to be careful with the incentives they choose. Incentives can build or destroy the innovation culture of the company they lead. A reflected balance of incentives based on performance, collaboration and strategic consistency is a good starting point to develop an optimal innovation culture for all stakeholders in the organization.

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